All Forum Posts by: Paul G.

I believe the correct answer here is 10.  State doesn't matter.

After 4-5 you will most likely not be able to get a loan from one of the bigger banks and will have to go with a smaller lender without overlays, but they're still doable...

I'm not sure there is a rule of thumb as it relates to making back the down payment.  I think the typical rule of thumbs are 1%/2% rule for rental price to purchase price.  There is also a rule of thumb that is up for debate on Cash Flow per door.  The main thing is are you investing for Cash Flow or Appreciation? YMMV depending on your market.  

Some things that I've seen (and use) for condos in my spreadsheet:

Cash Flow > $150/door

DSCR > 1.3 (NOI / a year of PI)

GRM < 10 (Property Price / Year of Gross Rent)

CoC Return > 8%* ( Cash Flow / Cash Outlay )

* This number will vary wildly by location and whether you're in an appreciation market or Cash Flow market

Post it on Zillow.  Very few people use Craigslist anymore.

And I agree with that, but you're getting into a gray area with FHA. As I understand it, the intent behind the law wasn't to live in it one year and then turn it into a rental. The intent was if after one year you decided that you needed to go bigger you could. Real Estate Investors have been able to manipulate and massage that law to benefit them, but I still would contend that you are taking advantage of the system and why it was created.

Sure, you will probably get away with it, but it doesn't mean it is morally and ethically appropriate.

@Nathan Allen What you are suggestion is mortgage fraud.

I also should be able to make this.  Looking forward to it

Isn't @Diane G. the one who got everyone riled up because of the one condo she found that is selling for less than in 2015?  Article here:  https://www.biggerpockets.com/forums/311/topics/45...

Chicken Little much?  I would subscribe to Occams Razor and say there is probably a pretty simple solution (Which I believe people posted about).  More Apartment buildings were created in the area of your rental, so demand went down.  That's a much more plausible explanation than the bubble bursting.

@Clayton Mobley and @Dave Foster Thanks so much for your responses.

My next step is my CPA and financial planner, but I wanted to have my basic understanding correct before I go down that route.  I like working on worst case scenarios (25% tax bracket), because I'd like to think that I will always be in that bracket moving forward. :).  Also, with my profession, as long as I stay a W2 earner, I will always be 25% or higher. (I'm not sure I'll ever be able to get out of a W2 job as well, since I have some expensive hobbies :-/ )

I have a question regarding 1031 Exchanges in regards to depreciation recapture and capital gains Taxes.  This is purely hypothetical, but I want to look forward to make sure I'm structuring everything correctly.  Also, I want to note, I'm assuming 100% financed loan to start.  I know you can't do this, but I want to basically take a look at it from the most simplistic model I can.

I own Property #1

Bought: 75K

Sold in year 5: 150K

Depreciation: 2.5K/y

If I were to sell, assuming those are my only numbers (I don't want to make it overly complicated).  I would pay:

Depreciation Recapture Tax: 3K (25% on depreciation recapture of 12.5K)

Capital Gains Tax: 11.25K (15% on capital gains 150K - 75K = 75K)

I would net 75K + whatever I've paid down through 5 years - (recapture and cap gains.)

Now, say I roll that into a new property using a 1031 and buy for 200K. Again, I dont want to overly complicate things, so assume I roll everything in.

Then same thing applies:

Bought 200K (down payment is whatever I calculated above)

Sold in year 5: 300K

Depreciation: 4K/y

Is this how I calculated my Depreciation and Capital gains?

Depreciation Recapture Tax: 7K (3K from previous property + 25% of 20K for new property depreciation).

Capital Gains Tax: 26.25K (11.25K from previous property + 15% on capital gains 300K - 200K = 100K)

So, all in all, after selling both properties if I want to pay tax after my second property and NOT 1031 again, I would end up owing 33.25K in taxes on my 100K in gains + whatever I put down prior?

@Andrey Y. Come on now, you can't really believe that?!? That same CEO has the same chance of creating a breakthrough product that doubles or quadruples their company profit, which gets reflected in the stock rise.  (In fact, I bet it'll be a better chance than your comment about the wife and the pool boy). 

You keep bringing up fees.  What fees are we talking about?  you mean the 0.04% fees for the S&P500 fund VFAIX or VOO?  That's $4 for every $10,000 invested per year.  Both of those are averaging 8% APY as well.  How much are your closing costs, depreciation recapture tax, and loan origination? And being in an index fund you're invested in 500 companies, so even if one CEO goes off the rails, they aren't largely invested, most are well under 3%.  

Taxes, I've already talked about, but I'm sure you're aware a 401K and a Roth IRA are both tax shelters. So, you either pay less tax now when you're at your highest earning potential, or are tax free on earnings. Reading your profile youre a very high earner. In fact, you're in or close to the 33% tax bracket. When you retire, do you really think you're going to still be in that bracket? I doubt it. Also, as it relates to taxes, sure you can kick the can down the road with real estate, but you either will never sell and 1031 until you die, or pay a hell of a lot of tax when you do. And at that point, I really hope you have a plan for when you're older. That whole 25% automatic depreciation recapture can be a killer.

Inflation, ok fine got me there, but inflation hits Real Estate all the same...  Sure you can leverage yourself, but if your property doesn't appreciate, then your whole comment on leverage is moot.  You end up with a fully depreciated asset that is the same cost when you bought it than when you sold it.  But now you have depreciation recapture.  Hooray.  Time to 1031 it until you die.

Human Emotion.  Not sure where you're going with this unless this is a reference back to your mysterious pool boy that is going to sink a Fortune 500 company.

I keep bringing up S&P500 because most 401Ks will offer something that tracks this.  Here are the top 10 holdings in the S&P for Vanguard:

Those are some pretty stable companies and most have been around for a LONG time.  I would trust those CEOs.

Now, you can fault ETFs and Mutual funds for not being sexy or flashy.  And sorry, but no one is going to want to talk to you about it over a dinner party.  But if that's all you got on them, then I don't know what to tell you.  They're safe and provide a relatively consistent return.  

And lastly, your comment about why is everyone doing it is frankly wrong.  Getting into investing in stocks as a whole and not just in a 401K here.  How is investing in a company you believe in, or a product you like, or a sector you know a lot in less creative than plugging a number into a formula to determine whether the property will be profitable, then writing a contract, and then passing it onto a PM company and never touch it again?  Hooray, you get to choose a city to invest in, or an asset type.  Then you ignore it forever and hope that the PM company doesn't scam you, your tenant doesn't create a meth lab, the government doesn't indemnify it, on and on and on.  How is that any more creative?!?  How is being a RE investor who wants to be "passive" creative at all?

Stocks offer an avenue for every single market.  Just like Real Estate, you can profit in a bull, a bear, or a neutral market.  You can get in and out in minutes and not months.  You have the flexibility to completely change your strategy daily.  You can get involved in stock with a Credit Score of 0 and as little as $10 if you wanted.  Tell me how that isn't creative?

It's great that you've found wealth through Real Estate, but just because you don't want to follow the norm doesn't make you smarter than everyone else.  Sorry, but I'll learn from Warren Buffett over you any day of the week.  (Please don't take that as an insult btw. That is meant as no offense to you, I'm sure you're very smart.  I'm just an old school Warren Buffett homer).  I bet a similar percentage of "RE investors" got wiped out in 2008 as did people in stock.  No bet is without risk.  It's about managing that risk (a la diversification).

In my opinion, diversification is the name of the game for retirement. I plan on being mostly retired by 50. (It all depends on when I have my kids). Who knows though, I love what I do, so I could work longer just because I find it interesting and worthwhile.  I'm obviously more comfortable in the stock market, where you are much more comfortable in the Real Estate market.  That's why I'm on Bigger Pockets though.  So I can learn more about real estate and grow.  Maybe one day I'll see it the same as you.  Even then, I don't think I would ever dissuade or tell someone not to invest in the market.